Quarterly Report (10-q)

Date : 08/01/2019 @ 12:38PM
Source : Edgar (US Regulatory)
Stock : InterDigital Inc (IDCC)
Quote : 57.54  0.0 (0.00%) @ 12:00AM

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

Commission File Number 1-33579
INTERDIGITAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania
 
82-4936666
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
200 Bellevue Parkway , Suite 300 , Wilmington , DE 19809-3727
(Address of Principal Executive Offices and Zip Code)
( 302 281-3600
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
IDCC
NASDAQ Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Common Stock, par value $0.01 per share
31,127,273
Title of Class
Outstanding at July 30, 2019
 



INDEX

 
 
 
PAGES
 
 
 
InterDigital ® is a registered trademark of InterDigital, Inc. All other trademarks, service marks and/or trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.





PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
 
JUNE 30,
2019
 
DECEMBER 31,
2018
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
531,698

 
$
475,056

Short-term investments
299,461

 
470,724

Accounts receivable, less allowances of $537 and $693
57,183


35,032

Prepaid and other current assets
52,656


43,438

Total current assets
940,998

 
1,024,250

PROPERTY AND EQUIPMENT, NET
10,736


10,051

PATENTS, NET
438,732

 
454,567

DEFERRED TAX ASSETS
83,202

 
77,225

OTHER NON-CURRENT ASSETS
71,398


60,465

 
604,068

 
602,308

TOTAL ASSETS
$
1,545,066

 
$
1,626,558

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$
91,954

 
$

Accounts payable
14,455

 
19,367

Accrued compensation and related expenses
25,214

 
26,838

Deferred revenue
82,575


111,672

Taxes payable
637

 
1,508

Dividends payable
10,895

 
11,627

Other accrued expenses
17,168

 
8,383

Total current liabilities
242,898

 
179,395

LONG-TERM DEBT
342,417

 
317,377

LONG-TERM DEFERRED REVENUE
121,477


157,634

OTHER LONG-TERM LIABILITIES
38,034

 
34,139

TOTAL LIABILITIES
744,826

 
688,545

COMMITMENTS AND CONTINGENCIES

 

SHAREHOLDERS’ EQUITY:
 
 
 
Preferred Stock, $0.10 par value, 14,399 shares authorized, 0 shares issued and outstanding

 

Common Stock, $0.01 par value, 100,000 shares authorized, 71,260 and 71,134 shares issued and 31,126 and 33,529 shares outstanding
712

 
711

Additional paid-in capital
724,170

 
685,512

Retained earnings
1,418,628

 
1,435,970

Accumulated other comprehensive loss
(350
)
 
(2,471
)
 
2,143,160

 
2,119,722

Treasury stock, 40,134 and 37,605 shares of common held at cost
1,354,262

 
1,182,993

Total InterDigital, Inc. shareholders’ equity
788,898

 
936,729

Noncontrolling interest
11,342

 
1,284

Total equity
800,240

 
938,013

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,545,066

 
$
1,626,558


The accompanying notes are an integral part of these statements.

3


INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
 
FOR THE THREE MONTHS ENDED JUNE 30,
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
 
2019
 
2018
 
2019
 
2018
 
REVENUES:
 
 
 
 
 
 
 
 
Patent licensing royalties
$
73,567

 
$
68,875

 
$
139,945

 
$
155,973

 
Technology solutions
2,042

 
680

 
4,070

 
1,026

 
Patent sales

 

 
225

 

 
 
75,609

 
69,555

 
144,240

 
156,999

 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
 
 
 
 
Patent administration and licensing
37,353

 
26,487

 
73,424

 
53,403

 
Development
17,027

 
15,829

 
35,522

 
32,003

 
Selling, general and administrative
12,314

 
11,559

 
26,529

 
25,763

 
 
66,694

 
53,875

 
135,475

 
111,169

 

 
 
 
 
 
 
 
 
Income from operations
8,915

 
15,680

 
8,765

 
45,830

 

 
 
 
 
 
 
 
 
INTEREST EXPENSE
(9,907
)
 
(8,960
)
 
(19,385
)
 
(18,203
)
 
OTHER INCOME (NET)
12,354

 
4,113

 
15,969

 
7,020

 
Income before income taxes
11,362

 
10,833

 
5,349

 
34,647

 
INCOME TAX BENEFIT (PROVISION)
(4,984
)
 
(1,057
)
 
(3,185
)
 
3,858

 
NET INCOME
$
6,378


$
9,776

 
$
2,164

 
$
38,505

 
Net loss attributable to noncontrolling interest
(1,365
)
 
(1,190
)
 
(2,776
)
 
(2,691
)
 
NET INCOME ATTRIBUTABLE TO INTERDIGITAL, INC.
$
7,743

 
$
10,966

 
$
4,940

 
$
41,196

 
NET INCOME PER COMMON SHARE — BASIC
$
0.25

 
$
0.32

 
$
0.15

 
$
1.19

 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — BASIC
31,547

 
34,769

 
32,076

 
34,705

 
NET INCOME PER COMMON SHARE — DILUTED
$
0.24

 
$
0.31

 
$
0.15

 
$
1.16

 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — DILUTED
31,776

 
35,631

 
32,366

 
35,619

 

The accompanying notes are an integral part of these statements.

4


INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

 
FOR THE THREE MONTHS ENDED JUNE 30,
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
6,378

 
$
9,776

 
$
2,164

 
$
38,505

Unrealized gain (loss) on investments, net of tax
1,076

 
376

 
2,121

 
(1,371
)
Comprehensive income
$
7,454

 
$
10,152

 
$
4,285

 
$
37,134

Comprehensive loss attributable to noncontrolling interest
(1,365
)
 
(1,190
)
 
(2,776
)
 
(2,691
)
Total comprehensive income attributable to InterDigital, Inc.
$
8,819

 
$
11,342

 
$
7,061

 
$
39,825


The accompanying notes are an integral part of these statements.


5


INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share data)
(unaudited)
 
 
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
 Income (Loss)
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
 Paid-In Capital
 
Retained Earnings
 
 
Treasury Stock
 
Non-Controlling
Interest
 
Total
Shareholders'
Equity
 
Shares
 
Amount
 
 
 
 
 Shares
 
Amount
 
BALANCE, DECEMBER 31, 2017
70,749

 
$
707

 
$
680,040

 
$
1,257,632

 
$
(2,083
)
 
36,127

 
$
(1,072,488
)
 
$
9,340


873,148

Cumulative effect of change in accounting principle

 

 

 
161,701

 
(449
)
 

 

 

 
161,252

Net income attributable to InterDigital, Inc.

 

 

 
30,230

 

 

 

 

 
30,230

Net loss attributable to noncontrolling interest

 

 

 

 

 

 

 
(1,501
)
 
(1,501
)
Net change in unrealized gain (loss) on short-term investments

 

 

 

 
(1,747
)
 

 

 

 
(1,747
)
Dividends declared ($0.35 per share)

 

 
115

 
(12,280
)
 

 

 

 

 
(12,165
)
Issuance of common stock, net
208

 
2

 
(8,279
)
 

 

 

 

 

 
(8,277
)
Amortization of unearned compensation

 

 
816

 

 

 

 

 

 
816

Repurchase of common stock

 

 

 

 

 
84

 
(6,024
)
 

 
(6,024
)
BALANCE, MARCH 31, 2018
70,957

 
$
709

 
$
672,692

 
$
1,437,283

 
$
(4,279
)
 
36,211

 
$
(1,078,512
)
 
$
7,839

 
1,035,732

Net income attributable to InterDigital, Inc.

 

 

 
10,966

 

 

 

 

 
10,966

Net loss attributable to noncontrolling interest

 

 

 

 

 

 

 
(1,190
)
 
(1,190
)
Net change in unrealized gain (loss) on short-term investments

 

 

 

 
376

 

 

 

 
376

Dividends declared ($0.35 per share)

 

 
102

 
(12,255
)
 

 

 

 

 
(12,153
)
Exercise of common stock options
90

 
1

 
3,930

 

 

 

 

 

 
3,931

Issuance of common stock, net
12

 

 
(111
)
 

 

 

 

 

 
(111
)
Amortization of unearned compensation

 

 
1,821

 

 

 

 

 

 
1,821

Repurchase of common stock

 

 

 

 

 
40

 
(3,148
)
 

 
(3,148
)
BALANCE, JUNE 30, 2018
71,059

 
$
710

 
$
678,434

 
$
1,435,994

 
$
(3,903
)
 
36,251

 
$
(1,081,660
)
 
$
6,649

 
1,036,224



6


 
 
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
 Income (Loss)
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
 Paid-In Capital
 
Retained Earnings
 
 
Treasury Stock
 
Non-Controlling
Interest
 
Total
Shareholders'
Equity
 
Shares
 
Amount
 
 
 
 
 Shares
 
Amount
 
BALANCE, DECEMBER 31, 2018
71,134

 
$
711

 
$
685,512

 
$
1,435,970

 
$
(2,471
)
 
37,605

 
$
(1,182,993
)
 
$
1,284

 
$
938,013

Net loss attributable to InterDigital, Inc.

 

 

 
(2,803
)
 

 

 

 

 
(2,803
)
Proceeds from and increases in noncontrolling interests

 

 

 

 

 

 

 
12,834

 
12,834

Net loss attributable to noncontrolling interest

 

 

 

 

 

 

 
(1,411
)
 
(1,411
)
Net change in unrealized gain (loss) on short-term investments

 

 

 

 
1,045

 

 

 

 
1,045

Dividends declared ($0.35 per share)

 

 
103

 
(11,283
)
 

 

 

 

 
(11,180
)
Exercise of common stock options

 

 
2

 

 

 

 

 

 
2

Issuance of common stock, net
116

 
1

 
(4,098
)
 

 

 

 

 

 
(4,097
)
Amortization of unearned compensation

 

 
2,096

 

 

 

 

 

 
2,096

Repurchase of common stock

 

 

 

 

 
1,585

 
(108,986
)
 

 
(108,986
)
BALANCE, MARCH 31, 2019
71,250

 
$
712

 
$
683,615

 
$
1,421,884

 
$
(1,426
)
 
39,190

 
$
(1,291,979
)
 
$
12,707

 
$
825,513

Net income attributable to InterDigital, Inc.

 

 

 
7,743

 

 

 

 

 
7,743

Net loss attributable to noncontrolling interest

 

 

 

 

 

 

 
(1,365
)
 
(1,365
)
Net change in unrealized gain (loss) on short-term investments

 

 

 

 
1,076

 

 

 

 
1,076

Dividends declared ($0.35 per share)

 

 
104

 
(10,999
)
 

 

 

 

 
(10,895
)
Issuance of common stock, net
10

 

 
(40
)
 

 

 

 

 

 
(40
)
Amortization of unearned compensation

 

 
2,116

 

 

 

 

 

 
2,116

Repurchase of common stock

 

 

 

 

 
944

 
(62,283
)
 

 
(62,283
)
Equity component of debt, net of tax

 

 
56,917

 

 

 

 

 

 
56,917

Net convertible note hedge transactions, net of tax

 

 
(49,740
)
 

 

 

 

 

 
(49,740
)
Net warrant transactions

 

 
43,416

 

 

 

 

 

 
43,416

Deferred financing costs allocated to equity, net of tax

 

 
(1,569
)
 

 

 

 

 

 
(1,569
)
Reacquisition of equity component of debt due to prepayment, net of tax

 

 
(10,649
)
 

 

 

 

 

 
(10,649
)
BALANCE, JUNE 30, 2019
71,260

 
$
712

 
$
724,170

 
$
1,418,628

 
$
(350
)
 
40,134

 
$
(1,354,262
)
 
$
11,342

 
$
800,240


The accompanying notes are an integral part of these statements.


7



INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
2,164


$
38,505

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
37,642

 
29,338

Non-cash interest expense, net
8,563

 
6,821

Non-cash change in fair-value
710

 

Gain on asset acquisition
(14,175
)
 

Change in deferred revenue
(62,754
)
 
(27,167
)
Loss on extinguishment of debt
5,488

 

Deferred income taxes
(5,714
)
 
(9,367
)
Share-based compensation
4,212

 
2,637

Other
623

 
29

(Increase) decrease in assets:
 
 
 
Receivables
(22,169
)
 
(16,473
)
Deferred charges and other assets
(6,463
)
 
(6,793
)
Increase (decrease) in liabilities:
 
 
 
Accounts payable
(3,105
)
 
(2,858
)
Accrued compensation and other expenses
2,326

 
(2,905
)
Accrued taxes payable and other tax contingencies
(871
)
 
(5,535
)
Net cash provided by (used in) operating activities
(53,523
)

6,232

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of short-term investments
(92,074
)
 
(101,159
)
Sales of short-term investments
267,289

 
248,190

Purchases of property and equipment
(2,862
)

(1,542
)
Capitalized patent costs
(17,840
)
 
(14,507
)
Acquisition of patents

 
(2,250
)
Long-term investments

 
(6,250
)
Net cash provided by investing activities
154,513

 
122,482

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from exercise of stock options
2

 
3,930

Payments on long-term debt
(221,091
)
 

Proceeds from issuance of convertible senior notes
400,000

 

Purchase of convertible bond hedge
(72,000
)
 

Payment for warrant unwind
(4,184
)
 

Prepayment penalty on long-term debt
(10,763
)
 

Proceeds from hedge unwind
9,038

 

Proceeds from issuance of warrants
47,600

 

Payments of debt issuance costs
(7,300
)
 

Proceeds from non-controlling interests
10,333

 

Dividends paid
(22,789
)

(24,319
)
Taxes withheld upon restricted stock unit vestings
(4,137
)
 
(8,388
)
Repurchase of common stock
(171,269
)
 
(9,172
)
Net cash used in financing activities
(46,560
)
 
(37,949
)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
54,430

 
90,765

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
488,733

 
433,014

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
$
543,163

 
$
523,779

                                   
Refer to Note 1, " Basis of Presentation, " for additional supplemental cash flow information. Additionally, refer to Note 2, " Leases " for information regarding the impact of our adoption of the new leases accounting standard, ASC 842, and Note 8, " Cash, Concentration of Credit Risk and Fair Value of Financial Instruments " for a reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets.
The accompanying notes are an integral part of these statements.

8


INTERDIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited, condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial position of InterDigital, Inc. (individually and/or collectively with its subsidiaries referred to as “InterDigital,” the “Company,” “we,” “us” or “our,” unless otherwise indicated) as of June 30, 2019 , and the results of our operations for the three and six months ended June 30, 2019 , and 2018 and our cash flows for the six months ended June 30, 2019 , and 2018 . The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, accordingly, do not include all of the detailed schedules, information and notes necessary to state fairly the financial condition, results of operations and cash flows in conformity with United States generally accepted accounting principles (“GAAP”). The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP for year-end financial statements. Therefore, these financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (our “ 2018 Form  10-K ”) as filed with the Securities and Exchange Commission (“SEC”) on February 21, 2019. Definitions of capitalized terms not defined herein appear within our 2018 Form 10-K. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. We have one reportable segment.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Change in Accounting Policies
There have been no material changes or updates to our existing accounting policies from the disclosures included in our 2018 Form 10-K , except as indicated in Note 2, " Leases ".
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Prior Periods Financial Statement Revision
In connection with the preparation of the condensed consolidated financial statements for first quarter 2019, it was identified that we incorrectly attributed tax benefit to the net loss attributable to noncontrolling interest in our presentation of noncontrolling interest.
We assessed the materiality of this misstatement on prior periods’ financial statements in accordance with ASC Topic 250, Accounting Changes and Error Corrections , (“ASC 250”) and concluded it was not material to any prior annual or interim periods. In accordance with ASC 250, we have corrected our presentation of noncontrolling interest for all prior periods presented in this Form 10-Q by revising the condensed consolidated financial statements and other consolidated financial information included herein. We will continue to present the prior periods on this revised basis to the extent we present such prior periods in future filings. Refer to Note 12, " Revision to Noncontrolling Interest " for additional information on the revision.
Supplemental Cash Flow Information
The following table presents additional supplemental cash flow information for the six months ended June 30, 2019 and 2018:

9


 
FOR THE SIX MONTHS ENDED JUNE 30,
SUPPLEMENTAL CASH FLOW INFORMATION:
2019
 
2018
Interest paid
3,218

 
2,370

Income taxes paid, including foreign withholding taxes
9,770

 
10,799

Non-cash investing and financing activities:
 
 
 
Dividend payable
10,895

 
12,193

Increases in noncontrolling interests
2,500

 

Accrued debt issuance costs
(1,075
)
 

Accrued capitalized patent costs, acquisition of patents and property and equipment
(1,910
)
 
(1,991
)
New Accounting Guidance
Accounting Standards Update: Leases
In February 2016, the FASB issued ASU 2016-02, " Leases (Topic 842) " or ("ASC 842"), which outlines a comprehensive change to the lease accounting model and supersedes prior lease guidance. Refer to Note 2, " Leases ," for information regarding our adoption of this guidance effective January 1, 2019 and a discussion of the impact to information presented herein, as well as additional required disclosures under the new guidance.
Accounting Standards Update: Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB issued ASU No. 2018-07, " Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ," which is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to nonemployees. The guidance is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. We adopted this guidance in first quarter 2019 and it did not have a material impact on our consolidated financial statements.
Accounting Standards Update: Cloud Computing Arrangements
In August 2018, the FASB issued ASU No. 2018-15 “ Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract ”. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. We are in the process of determining the effect the adoption will have on our consolidated financial statements.
Accounting Standards Update: Collaborative Arrangements
In November 2018, the FASB issued ASU No. 2018-18, " Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606 ".  The amendments in this ASU provide guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the revenue recognition standard. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted for entities who have previously adopted the new revenue recognition guidance. We are in the process of determining the effect the adoption will have on our consolidated financial statements.
2. LEASES
In February 2016, the FASB issued ASC 842, which outlines a comprehensive change to the lease accounting model and supersedes prior lease guidance ("ASC 840"). The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months, and also changes the definition of a lease and expands the disclosure requirements of lease arrangements.
The Company adopted this guidance on January 1, 2019 using the modified retrospective transition effective date method. As part of that adoption, we have elected the package of three practical expedients, which includes the following: an entity may elect not to reassess whether expired or existing contracts contain a lease under the revised definition of a lease; an entity may elect not to reassess the lease classification for expired or existing leases; and an entity may elect not to reassess whether previously capitalized initial direct costs would qualify for capitalization. The Company has elected not to utilize the hindsight expedient in determining the lease term, and to not record leases with an initial term of 12 months or less on our balance sheet. Additionally, the Company has elected to account for lease components and non-lease components as a single lease component for all asset classes. Lease expense is recognized over the expected term on a straight-line basis. The

10


adoption did not have a material impact on the Company's condensed consolidated statements of income or cash flows.
The Company enters into operating leases primarily for real estate to support research and development ("R&D") sites and general office space in North America, with additional locations in Europe and Asia. The Company does not currently have any finance leases. Certain of our leases include options to extend the lease at our discretion at the end of the lease term, or terminate the lease early subject to certain conditions and penalties. We do not include any renewal options in our lease terms for calculating our lease liabilities, as the renewal options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these options.
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the specific facts and circumstances present. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable, and, as such, the Company utilizes its incremental borrowing rate as the discount rate based on information available on the lease commencement date. Our incremental borrowing rate represents the rate we would incur to borrow on a collateralized basis over a similar term for an amount equal to the lease payments in a similar economic environment. We utilized the incremental borrowing rate as of January 1, 2019, our adoption date, for operating leases that commenced prior to that date. Upon our adoption of ASU 2016-02, the Company recorded the following operating lease right-of-use assets and operating lease liabilities as of January 1, 2019. Additionally, the table below includes the balances of operating lease right-of-use assets and operating lease liabilities as of June 30, 2019 (in thousands):
 
Balance Sheet Classification
 
January 1, 2019
 
June 30, 2019
Assets
 
 
 
 
 
  Operating lease right-of-use assets, net
Other Non-current Assets
 
$
13,634

 
$
17,530

Total Lease Assets
 
 
$
13,634

 
$
17,530

 
 
 
 
 
 
Liabilities
 
 
 
 
 
  Operating lease liabilities - Current
Other Accrued Expenses
 
$
3,519

 
$
3,963

  Operating lease liabilities - Noncurrent
Other Long-Term Liabilities
 
13,652

 
16,920

Total Lease Liabilities
 
 
$
17,171

 
$
20,883

The components of lease costs which were included within operating expenses in our condensed consolidated statements of income were as follows (in thousands):

 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2019
Operating lease cost
$
1,105

 
$
2,115

Short-term lease cost
310

 
520

Variable lease cost
381

 
692

For the three and six months ended June 30, 2019 , sublease income was insignificant. Cash paid for amounts included in the measurement of operating lease liabilities for the three and six months ended  June 30, 2019 was $1.3 million  and $2.4 million , respectively, and was included in net cash used in operating activities in our condensed consolidated statements of cash flows. Operating lease right-of-use assets obtained in exchange for operating lease obligations totaled $5.5 million during the three and six months ended June 30, 2019. As of  June 30, 2019 , the weighted average remaining operating lease term was 5.7 years and the weighted average discount rate used to determine the operating lease liabilities was  6.2% . The maturities of our operating lease liabilities as of June 30, 2019 under ASC 842, excluding short-term leases with terms less than 12 months, were as follows (in thousands): 

11


Maturity of Operating Lease Liabilities
June 30, 2019
Remainder 2019
$
2,803

2020
4,498

2021
3,989

2022
4,021

2023
3,285

Thereafter
6,384

Total lease payments
$
24,980

Less: Imputed interest
(4,097
)
Present value of lease liabilities
$
20,883


The undiscounted maturities of our operating leases as of December 31, 2018 under ASC 840, including short-term leases with terms less than 12 months, were as follows (in thousands):
Maturity of Operating Leases
December 31, 2018
2019
$
5,362

2020
3,386

2021
2,883

2022
2,920

2023
2,184

Thereafter
5,582



3. REVENUE
Disaggregated Revenue
The following table presents the disaggregation of our revenue for the three and six months ended June 30, 2019 and 2018 (in thousands):

12


 
Three months ended June 30,
 
 
 
 
 
2019
 
2018
 
 Increase/(Decrease)
Variable patent royalty revenue
$
8,594

 
$
6,594

 
$
2,000

 
30
 %
Fixed-fee royalty revenue
63,736

 
60,264

 
3,472

 
6
 %
Current patent royalties a
72,330

 
66,858

 
5,472

 
8
 %
Non-current patent royalties b
1,237

 
2,017

 
(780
)
 
(39
)%
Total patent royalties
73,567

 
68,875

 
4,692

 
7
 %
Current technology solutions revenue a
2,042

 
680

 
1,362

 
200
 %
Total revenue
$
75,609

 
$
69,555

 
$
6,054

 
9
 %
 
Six months ended June 30,
 
 
 
 
 
2019
 
2018
 
 Increase/(Decrease)
Variable patent royalty revenue
$
17,874

 
$
12,677

 
$
5,197

 
41
 %
Fixed-fee royalty revenue
126,609

 
117,935

 
8,674

 
7
 %
Current patent royalties a
144,483

 
130,612

 
13,871

 
11
 %
Non-current patent royalties b
(4,538
)
 
25,361

 
(29,899
)
 
(118
)%
Total patent royalties
139,945

 
155,973

 
(16,028
)
 
(10
)%
Current technology solutions revenue a
4,070

 
1,026

 
3,044

 
297
 %
Patent sales b
225

 

 
225

 
 %
Total revenue
$
144,240

 
$
156,999

 
$
(12,759
)
 
(8
)%

a.
Recurring revenues are comprised of current patent royalties, inclusive of Dynamic Fixed-Fee Agreement royalties, and current technology solutions revenue.
b.
Non-recurring revenues are comprised of non-current patent royalties, which primarily include past patent royalties and royalties from static agreements, as well as patent sales.
    During first half 2019 , we recognized $79.9 million of revenue that had been included in deferred revenue as of the beginning of the period. As of June 30, 2019 , we had contract assets of $49.7 million and $1.3 million included within accounts receivable and other non-current assets, respectively. As of December 31, 2018, we had contract assets of $19.7 million and $5.5 million included within accounts receivable and other non-current assets, respectively.
Contracted Revenue
Based on contracts signed and committed as of June 30, 2019 , we expect to recognize the following revenue from Dynamic Fixed-Fee Agreement payments over the term of such contracts (in thousands):
 
Revenue
Remainder 2019
$
128,221

2020
248,250

2021
178,583

2022
85,228

2023


4. INCOME TAXES
In first half 2019 , based on the statutory federal tax rate net of discrete federal and state taxes, we had an effective tax rate of 59.5% . The first half 2019 rate was impacted by losses in certain jurisdictions where the Company presently has recorded a valuation allowance against the related tax benefit. Excluding this valuation allowance, our first half 2019 effective tax rate would have been 20.4% . In first half 2019, the Company recorded a net discrete tax expense of $3.4 million related to both the acquisition of the Research & Innovation ("R&I") unit of Technicolor SA and the extinguishment of long-term debt recognized during second quarter 2019. Refer to Note 7, " Business Combinations and Other Transaction s" and Note 9, " Long-

13


Term Debt " for further discussion of these transactions. This is compared to an effective tax rate benefit of 11.1% based on the statutory federal tax rate net of discrete federal and state taxes during first half 2018 . During first half 2018 , we recorded discrete benefits of $3.7 million related to excess tax benefits in connection with share-based compensation and our sale of a commercial initiative.  Excluding these discrete benefits, the effective tax rate would have been a benefit of  0.6% .
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Tax Reform Act") was signed into law. The Tax Reform Act imposes a 13.125% tax rate on income that qualifies as Foreign Derived Intangible Income ("FDII"). The reduction in benefit is primarily related to the differences in our FDII deduction between the periods. The difference in the FDII deduction between the periods was driven by the timing of income between book and tax mostly related to revenue recognition. On March 6, 2019, the IRS issued proposed regulations for FDII. The Company is currently evaluating the impact of the proposed regulations and will record the impact, if any, as applicable.  
The effective tax rate reported in any given year will continue to be influenced by a variety of factors, including timing differences between the recognition of book and tax revenue, the level of pre-tax income or loss, the foreign vs. domestic classification of the Company’s customers, and any discrete items that may occur. The Company further notes that its tax positions could be altered by pending IRS regulations that could clarify certain provisions of the Tax Reform Act.
During first half 2019 and 2018 , we paid approximately $5.1 million and $9.5 million , respectively, of foreign source withholding tax. Additionally, as of June 30, 2019 and December 31, 2018, we included approximately $0.6 million and $1.5 million , respectively, of foreign source withholding tax within our taxes payable and deferred tax asset balances. These amounts are related to receivables from foreign licensees.
5. NET INCOME (LOSS) PER SHARE
Basic Earnings Per Share ("EPS") is calculated by dividing net income or loss available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if options or other securities with features that could result in the issuance of common stock were exercised or converted to common stock. The following tables reconcile the numerator and the denominator of the basic and diluted net income (loss) per share computation (in thousands, except for per share data):
 
Three months ended June 30,
 
2019
 
2018
 
Basic
 
Diluted
 
Basic
 
Diluted
Numerator:
 
 
 
 
 
 
 
Net income applicable to InterDigital, Inc.
$
7,743

 
$
7,743

 
$
10,966

 
$
10,966

Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding: Basic
31,547

 
31,547

 
34,769

 
34,769

Dilutive effect of stock options, RSUs, convertible securities and warrants
 
 
229

 
 
 
862

Weighted-average shares outstanding: Diluted
 
 
31,776

 
 
 
35,631

Earnings Per Share:
 
 
 
 
 
 
 
Net income per common share: Basic
$
0.25

 
$
0.25

 
$
0.32

 
$
0.32

Dilutive effect of stock options, RSUs, convertible securities and warrants
 
 
(0.01
)
 
 
 
(0.01
)
Net income per common share: Diluted
 
 
$
0.24

 
 
 
$
0.31



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Six months ended June 30,
 
2019
 
2018
 
Basic
 
Diluted
 
Basic
 
Diluted
Numerator:
 
 
 
 
 
 
 
Net income applicable to InterDigital, Inc.
$
4,940

 
$
4,940

 
$
41,196

 
$
41,196

Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding: Basic
32,076

 
32,076

 
34,705

 
34,705

Dilutive effect of stock options, RSUs, convertible securities and warrants
 
 
290

 
 
 
914

Weighted-average shares outstanding: Diluted
 
 
32,366

 
 
 
35,619

Earnings Per Share:
 
 
 
 
 
 
 
Net income per common share: Basic
$
0.15

 
$
0.15

 
$
1.19

 
$
1.19

Dilutive effect of stock options, RSUs, convertible securities and warrants
 
 

 
 
 
(0.03
)
Net income per common share: Diluted
 
 
$
0.15

 
 
 
$
1.16

Shares of common stock issuable upon the exercise or conversion of certain securities have been excluded from our computation of EPS because the strike price or conversion rate, as applicable, of such securities was greater than the average market price of our common stock and, as a result, the effect of such exercise or conversion would have been anti-dilutive. Set forth below are the securities and the weighted average number of shares of common stock underlying such securities that were excluded from our computation of EPS for the periods presented (in thousands).
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Restricted stock units and stock options
153

 
26

 
102

 
25

Convertible securities
4,986

 

 
4,715

 

Warrants
4,986

 
4,405

 
4,715

 
4,404

Total
10,125

 
4,431

 
9,532

 
4,429


Convertible Notes and Warrants
Refer to Note 9, " Long-Term Debt ," for information about the Company's convertible notes and warrants and related conversion and strike prices. During periods in which the average market price of the Company's common stock is above the applicable conversion price of the Company's convertible notes, or above the strike price of our outstanding warrants, the impact of conversion or exercise, as applicable, would be dilutive and such dilutive effect is reflected in diluted EPS. As a result, in periods where the average market price of the Company's common stock is above the conversion price or strike price, as applicable, under the treasury stock method, the Company calculates the number of shares issuable under the terms of the convertible notes and the warrants based on the average market price of the stock during the period, and includes that number in the total diluted shares outstanding for the period.
6. LITIGATION AND LEGAL PROCEEDINGS
ARBITRATIONS AND COURT PROCEEDINGS (OTHER THAN DELAWARE DISTRICT COURT ACTIONS RELATED TO USITC PROCEEDINGS)
Asustek Actions
On April 15, 2015, Asustek Computer Incorporated (“Asus”) filed a complaint in the U.S. District Court for the Northern District of California (the “CA Northern District Court”) against InterDigital, Inc., and its subsidiaries InterDigital Communications, Inc., InterDigital Technology Corporation, IPR Licensing, Inc., and InterDigital Patent Holdings, Inc. The complaint asserted the following causes of action: violation of Section Two of the Sherman Act, violation of Section 17200 of the California Business and Professions Code, breach of contract resulting from ongoing negotiations, breach of contract leading to and resulting in the parties’ April 2008 patent license agreement (the “2008 Asus PLA”), promissory estoppel, waiver, and fraudulent inducement to contract. Among other allegations, Asus alleged that InterDigital breached its commitment to be prepared to grant licenses to its standards-essential patents on fair, reasonable and non-discriminatory

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(“FRAND”) terms and conditions. As relief, Asus sought a judgment that the 2008 Asus PLA is void or unenforceable, damages in the amount of excess royalties Asus paid under the 2008 Asus PLA plus interest, a judgment setting the proper FRAND terms and conditions for InterDigital’s patent portfolio, an order requiring InterDigital to grant Asus a license on FRAND terms and conditions, and punitive damages and other relief.
In response, on May 30, 2015, InterDigital filed an Arbitration Demand with the ICDR. InterDigital claimed that Asus breached the 2008 Asus PLA’s dispute resolution provision by filing its CA Northern District Court lawsuit and sought declaratory relief that it is not liable for any of the claims in Asus’s complaint. On June 2, 2015, InterDigital filed in the CA Northern District Court a motion to compel arbitration on each of Asus’s claims. On August 25, 2015, the court granted InterDigital’s motion for all of Asus’s claims except its claim for breach of contract resulting from ongoing negotiations. Aside from this claim, the court ruled that the issue of arbitrability should be decided by an arbitrator, and stayed the proceedings pending that determination.
Asus asserted counterclaims in the arbitration that mirrored its CA Northern District Court claims, except that it did not assert the breach of contract claim that the court determined was not arbitrable and it added a claim of violation of the Delaware Consumer Fraud Act. Asus also contended that its counterclaims were not arbitrable. InterDigital added a claim for breach of the 2008 Asus PLA’s confidentiality provision.
On July 14, 2016, Asus filed a motion to lift the stay in the CA Northern District Court proceeding along with a notice of the arbitral tribunal’s decision on arbitrability, informing the court of the arbitrators’ decision that, other than InterDigital’s breach of contract claims and Asus’s fraudulent inducement claim, no other claim or counterclaim was arbitrable. Asus then filed in the CA Northern District Court an amended complaint on August 18, 2016. This amended complaint included all of the claims in Asus’s first CA Northern District Court complaint except fraudulent inducement and added a claim of violation of the Delaware Consumer Fraud Act. It sought the same relief as its first CA Northern District Court complaint, but also sought a ruling that each of InterDigital’s patents “declared [to standards-setting organizations] to be essential or potentially essential” be unenforceable and any contracts InterDigital entered into in furtherance of its unlawful conduct be void. On September 8, 2016, InterDigital filed its answer and counterclaims to Asus’s amended complaint. It denied Asus’s claims and filed a counterclaim for declaratory judgment that Asus’s tort claims were invalid or preempted as applied under the First Amendment to the U.S. Constitution, the Patent Clause of the U.S. Constitution, and Title 35 of the U.S. Code. On September 28, 2016, Asus answered and denied InterDigital’s counterclaims.
With respect to its arbitration counterclaim for fraudulent inducement, Asus stated in its pleadings that it was seeking return of excess royalties (which totaled close to $63 million as of the August 2016 date referenced in the pleadings and had increased with additional royalty payments made by Asus since such time), plus interest, costs and attorneys’ fees. The evidentiary hearing in the arbitration was held in January 2017, and the parties presented oral closing arguments on March 22, 2017. On August 2, 2017, the arbitral tribunal issued its Final Award. The tribunal fully rejected Asus’s counterclaim, finding that InterDigital did not fraudulently induce Asus to enter into the 2008 Asus PLA. Accordingly, the tribunal dismissed Asus’s fraudulent inducement counterclaim in its entirety. The tribunal also dismissed InterDigital’s claims that Asus breached the confidentiality provisions and the dispute resolution provisions of the 2008 Asus PLA. On October 20, 2017, InterDigital and Asus jointly moved to confirm both the tribunal’s Final Award and the Interim Award on Jurisdiction in the CA Northern District. The court confirmed both awards on October 25, 2017.
On April 16, 2018, InterDigital filed a motion in the CA Northern District Court proceeding for leave to amend its counterclaims to include a claim of intentional interference with contract. On June 12, 2018, the court denied this motion.
On April 17, 2018, the parties served opening expert reports in the CA Northern District Court proceeding. Asus’s damages expert contended that Asus was owed damages in the amount of $75.9 million based on its claims that InterDigital charged royalties inconsistent with its FRAND commitments. Those damages, which represented a substantial portion of the royalties paid by Asus through third quarter 2017, did not reflect Asus’s most recent royalty payments. Asus also sought interest, costs and attorneys’ fees, as well as, in connection with its Sherman Act claim, treble damages.
On August 16, 2018, the parties filed motions for summary judgment in the CA Northern District Court proceeding. The parties filed oppositions on September 13, 2018 and replies on September 27, 2018, and the court held an oral argument on October 11, 2018.
On December 20, 2018, the CA Northern District Court issued an order on the parties’ motions for summary judgment. InterDigital’s motion was granted in part and denied in part, and Asus’s motion was denied in its entirety. The court: (1) granted summary judgment that Asus was judicially estopped from arguing that the 2008 Asus PLA is not FRAND compliant in light of Asus’s prior inconsistent positions; (2) denied to the extent ruled on by the court InterDigital’s motion that issue preclusion prevented Asus from re-litigating issues decided in the arbitration; (3) granted summary judgment that Asus could not invalidate the 2008 Asus PLA on the theory that, even if FRAND when signed, the 2008 Asus PLA became

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non-FRAND thereafter; (4) denied InterDigital’s motion for summary judgment that Asus’s Sherman Act claim failed as a matter of law; and (5) granted summary judgment that Asus’s promissory estoppel and California UCL claims failed as a matter of law. In addition, the court denied Asus’s motion for summary judgment that, as a matter of law, InterDigital breached its contractual obligation to license its essential patents on FRAND terms and conditions by engaging in discriminatory licensing practices. As a result of the summary judgment order, Asus’ claims of breach of contract leading to and resulting in the 2008 Asus PLA, promissory estoppel, and California UCL claims were dismissed from the case. On December 21, 2018, the court referred the case to a magistrate judge for a settlement conference. The settlement conference was held on February 14, 2019, but a settlement was not reached at that time.

In light of the court's ruling that Asus was judicially estopped from arguing that the 2008 Asus PLA was not FRAND compliant, on March 11, 2019, Asus revised its damages calculations downward, and updated the calculations to include sales through 2018. Asus was seeking damages for what it called “4G capable products” in the amount of $58.3 million for sales through 2018. Any damages attributable to a violation of the Sherman Act would have been subject to mandatory trebling, as well as an award of reasonable attorneys’ fees.

On April 4, 2019, Asus informed the court that it would not be proceeding to trial on its waiver and Delaware Consumer Fraud Act claims. A jury trial on Asus’ remaining claims--violation of Section 2 of the Sherman Act and breach of contract resulting from ongoing negotiations--was scheduled to commence on May 6, 2019, in the CA Northern District Court.

On April 9, 2019, the parties participated in another court-mandated settlement conference. On April 12, 2019, certain subsidiaries of InterDigital entered into a Settlement Agreement and First Amendment to the Patent License Agreement with Asus (the “Asus Settlement Agreement”), pursuant to which, among other things, the parties agreed to a multi-year amendment to the 2008 Asus PLA that added coverage for 4G technologies and amended certain other terms. The parties also agreed to dismiss all outstanding litigation and other proceedings among the parties, including, without limitation, the action in the CA Northern District Court described herein. The terms and conditions of the Asus Settlement Agreement are confidential. The action in the CA Northern District Court was dismissed on April 15, 2019, and there are no further proceedings in this matter.
2019 Huawei China Proceeding
On January 3, 2019, InterDigital was notified that a civil complaint was filed on January 2, 2019, by Huawei Technologies Co., Ltd. and certain of its subsidiaries against InterDigital, Inc. and certain of its subsidiaries in the Shenzhen Intermediate People’s Court. The complaint seeks a ruling that the InterDigital defendants have violated an obligation to license their patents that are essential to 3G, 4G and 5G wireless telecommunication standards on FRAND terms and conditions. The complaint also seeks a determination of the terms for licensing all of the InterDigital defendants’ Chinese patents that are essential to 3G, 4G and 5G wireless telecommunication standards to the Huawei plaintiffs for the plaintiffs’ wireless terminal unit products made and/or sold in China from 2019 to 2023. InterDigital’s patent license agreement with Huawei expired on December 31, 2018.
REGULATORY PROCEEDING
Investigation by National Development and Reform Commission of China (now State Administration for Market Regulation)
On September 23, 2013, counsel for InterDigital was informed by China’s National Development and Reform Commission (“NDRC”) that the NDRC had initiated a formal investigation into whether InterDigital has violated China’s Anti-Monopoly Law (“AML”) with respect to practices related to the licensing of InterDigital’s standards-essential patents to Chinese companies. Companies found to violate the AML may be subject to a cease and desist order, fines and disgorgement of any illegal gains. On March 3, 2014, the Company submitted to NDRC, pursuant to a procedure set out in the AML, a formal application for suspension of the investigation that included proposed commitments by the Company. On May 22, 2014, NDRC formally suspended its investigation of the Company based on the commitments proposed by the Company. The Company’s commitments with respect to the licensing of its patent portfolio for wireless mobile standards to Chinese manufacturers of cellular terminal units (“Chinese Manufacturers”) are as follows:
1.
Whenever InterDigital engages with a Chinese Manufacturer to license InterDigital’s patent portfolio for 2G, 3G and 4G wireless mobile standards, InterDigital will offer such Chinese Manufacturer the option of taking a worldwide portfolio license of only its standards-essential wireless patents, and comply with F/RAND principles when negotiating and entering into such licensing agreements with Chinese Manufacturers.

17


2. 
As part of its licensing offer, InterDigital will not require that a Chinese Manufacturer agree to a royalty-free, reciprocal cross-license of such Chinese Manufacturer's similarly categorized standards-essential wireless patents.
3. 
Prior to commencing any action against a Chinese Manufacturer in which InterDigital may seek exclusionary or injunctive relief for the infringement of any of its wireless standards-essential patents, InterDigital will offer such Chinese Manufacturer the option to enter into expedited binding arbitration under fair and reasonable procedures to resolve the royalty rate and other terms of a worldwide license under InterDigital's wireless standards-essential patents.  If the Chinese Manufacturer accepts InterDigital's binding arbitration offer or otherwise enters into an agreement with InterDigital on a binding arbitration mechanism, InterDigital will, in accordance with the terms of the arbitration agreement and patent license agreement, refrain from seeking exclusionary or injunctive relief against such company.
The commitments contained in item 3 above expired on May 22, 2019. With the consolidation of China’s anti-monopoly enforcement authorities into the State Administration for Market Regulation (“SAMR”) in April 2018, SAMR is now responsible for overseeing InterDigital’s commitments.
USITC PROCEEDINGS AND RELATED DELAWARE DISTRICT COURT PROCEEDINGS
2013 USITC Proceeding (337-TA-868) and Related ZTE Delaware District Court Proceeding
USITC Proceeding (337-TA-868)
On January 2, 2013, the Company’s wholly owned subsidiaries InterDigital Communications, Inc., InterDigital Technology Corporation, IPR Licensing, Inc. and InterDigital Holdings, Inc. filed a complaint with the United States International Trade Commission (the “USITC” or “Commission”) against Samsung Electronics Co., Ltd., Samsung Electronics America, Inc. and Samsung Telecommunications America, LLC, Nokia Corporation and Nokia Inc., Huawei Technologies Co., Ltd., Huawei Device USA, Inc. and FutureWei Technologies, Inc. d/b/a Huawei Technologies (USA) and ZTE Corporation and ZTE (USA) Inc. (collectively, the “337-TA-868 Respondents”), alleging violations of Section 337 of the Tariff Act of 1930 in that they engaged in unfair trade practices by selling for importation into the United States, importing into the United States and/or selling after importation into the United States certain 3G and 4G wireless devices (including WCDMA-, cdma2000- and LTE-capable mobile phones, USB sticks, mobile hotspots, laptop computers and tablets and components of such devices) that infringe one or more of up to seven of InterDigital’s U.S. patents. The complaint also extended to certain WCDMA and cdma2000 devices incorporating Wi-Fi functionality. InterDigital’s complaint with the USITC sought an exclusion order that would bar from entry into the United States infringing 3G or 4G wireless devices (and components), including LTE devices, that are imported by or on behalf of the 337-TA-868 Respondents, and also sought a cease-and-desist order to bar further sales of infringing products that have already been imported into the United States. Certain of the asserted patents were also asserted against Nokia, Huawei and ZTE in earlier pending USITC proceedings (including the Nokia, Huawei and ZTE 2011 USITC Proceeding (337-TA-800) and the Nokia 2007 USITC Proceeding (337-TA-613), as set forth below) and therefore were not asserted against those 337-TA-868 Respondents in this investigation.
On December 23, 2013, InterDigital and Huawei reached a settlement agreement to enter into binding arbitration to resolve their global patent licensing disputes.  Pursuant to the settlement agreement, InterDigital and Huawei moved to dismiss all litigation matters pending between the parties except for the now-resolved action filed by Huawei in China to set a FRAND rate for the licensing of InterDigital’s Chinese standards-essential patents. As a result, effective February 12, 2014, the Huawei Respondents were terminated from the 337-TA-868 investigation.
From February 10 to February 20, 2014, ALJ Essex presided over the evidentiary hearing in this investigation. The patents in issue in this investigation as of the hearing were U.S. Patent Nos. 7,190,966 (the “’966 patent”) and 7,286,847 (the “’847 patent”) asserted against ZTE and Samsung, and U.S. Patent No. 7,941,151 (the “’151 patent”) asserted against ZTE, Samsung and Nokia.
On June 3, 2014, InterDigital and Samsung filed a joint motion to terminate the investigation as to Samsung on the basis of settlement. The ALJ granted the joint motion by initial determination issued on June 9, 2014, and the USITC determined not to review the initial determination on June 30, 2014.
On June 13, 2014, the ALJ issued an Initial Determination (“ID”) in the 337-TA-868 investigation. In the ID, the ALJ found that no violation of Section 337 had occurred in connection with the importation of 3G/4G devices by ZTE or Nokia, on the basis that the accused devices do not infringe asserted claims 1-6, 8-9, 16-21 or 23-24 of the ’151 patent, claims 1, 3, 6, 8, 9, or 11 of the ’966 patent, or claims 3 or 5 of the ’847 patent. The ALJ also found that claim 16 of the ’151 patent was invalid as indefinite. Among other determinations, the ALJ further determined that InterDigital did not violate any FRAND

18


obligations, a conclusion also reached by the ALJ in the 337-TA-800 investigation, and that Respondents have engaged in patent “hold out.”
On June 30, 2014, InterDigital filed a Petition for Review with the USITC seeking review and reversal of certain of the ALJ’s conclusions in the ID. On the same day, Respondents filed a Conditional Petition for Review urging alternative grounds for affirmance of the ID’s finding that Section 337 was not violated and a Conditional Petition for Review with respect to FRAND issues.
In June 2014, Microsoft Mobile Oy (“MMO”) was added as a respondent in the investigation.
On August 14, 2014, the Commission determined to review in part the June 13, 2014 ID but terminated the investigation with a finding of no violation.
On October 10, 2014, InterDigital filed a petition for review with the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”), appealing certain of the adverse determinations in the Commission’s August 8, 2014 final determination including those related to the ’966 and ’847 patents. On June 2, 2015, InterDigital moved to voluntarily dismiss the Federal Circuit appeal, because, even if it were to prevail, it did not believe there would be sufficient time following the court’s decision and mandate for the USITC to complete its proceedings on remand such that the accused products would be excluded before the ’966 and ’847 patents expire in June 2016. The court granted the motion and dismissed the appeal on June 18, 2015.
Related Delaware District Court Proceeding
On January 2, 2013, the Company’s wholly owned subsidiaries InterDigital Communications, Inc., InterDigital Technology Corporation, IPR Licensing, Inc. and InterDigital Holdings, Inc. filed four related district court actions in the Delaware District Court against the 337-TA-868 Respondents. The proceedings against Huawei, Samsung and Nokia were subsequently dismissed, as discussed below. The remaining complaint alleges that ZTE infringes the same patents with respect to the same products alleged in the complaint filed by InterDigital in USITC Proceeding (337-TA-868). The complaint seeks a permanent injunction and compensatory damages in an amount to be determined, as well as enhanced damages based on willful infringement, and recovery of reasonable attorneys’ fees and costs.
On January 31, 2013, ZTE filed its answer and counterclaims to InterDigital’s Delaware District Court complaint; ZTE asserted counterclaims for breach of contract, equitable estoppel, waiver of right to enjoin and declarations that InterDigital has not offered ZTE licenses on FRAND terms, declarations seeking the determination of FRAND terms and declarations of noninfringement, invalidity and unenforceability. In addition to the declaratory relief specified in its counterclaims, ZTE seeks specific performance of InterDigital's purported contracts with ZTE and standards-setting organizations, appropriate damages in an amount to be determined at trial, reasonable attorneys’ fees and such other relief as the court may deem appropriate.    
On March 21, 2013, pursuant to stipulation, the Delaware District Court granted InterDigital leave to file an amended complaint against ZTE to assert allegations of infringement of the ’244 patent. On March 22, 2013, ZTE filed its answer and counterclaims to InterDigital’s amended Delaware District Court complaint. On April 9, 2013, InterDigital filed a motion to dismiss ZTE’s counterclaims relating to its FRAND allegations. On July 12, 2013, the Delaware District Court held a hearing on InterDigital’s motion to dismiss. By order issued the same day, the Delaware District Court granted InterDigital’s motion, dismissing ZTE's counterclaims for equitable estoppel and waiver of the right to injunction or exclusionary relief with prejudice. It further dismissed the counterclaims for breach of contract and declaratory relief related to InterDigital’s FRAND commitments with leave to amend.
On August 6, 2013, ZTE filed its answer and amended counterclaims for breach of contract and for declaratory judgment seeking determination of FRAND terms. The counterclaims also continue to seek declarations of noninfringement, invalidity, and unenforceability. On August 30, 2013, InterDigital filed a motion to dismiss the declaratory judgment counterclaim relating to the request for determination of FRAND terms. On May 28, 2014, the court granted InterDigital’s motion and dismissed ZTE's FRAND-related declaratory judgment counterclaim, ruling that such declaratory judgment would serve no useful purpose.
On December 30, 2013, InterDigital and Huawei filed a stipulation of dismissal on account of the confidential settlement agreement and agreement to arbitrate their disputes in this action. On the same day, the Delaware District Court granted the stipulation of dismissal and dismissed the action against Huawei.

19


On February 11, 2014, the Delaware District Court judge entered an InterDigital, Nokia, and ZTE stipulated Amended Scheduling Order that bifurcated issues relating to damages, FRAND-related affirmative defenses, and any FRAND-related counterclaims.
On August 28, 2014, the court granted in part a motion by InterDigital for summary judgment that the asserted ’151 patent is not unenforceable by reason of inequitable conduct, holding that only one of the references forming the basis of defendants’ allegations would remain in issue, and granted a motion by InterDigital for summary judgment that the asserted claims of the ’966 and ’847 patents are not invalid for lack of enablement.
On August 5, 2014, InterDigital and Samsung filed a stipulation of dismissal in light of the parties’ settlement agreement. On the same day, the court granted the stipulation of dismissal and dismissed the action against Samsung with prejudice.
By order dated August 28, 2014, MMO was joined in the case against Nokia as a defendant.
The ZTE trial addressing infringement and validity of the ’966, ’847, ’244 and ’151 patents was held from October 20 to October 27, 2014. During the trial, the judge determined that further construction of certain claim language of the ’151 patent was required, and the judge decided to hold another trial as to ZTE's infringement of the ’151 patent at a later date. On October 28, 2014, the jury returned a unanimous verdict in favor of InterDigital, finding that the ’966, ’847 and ’244 patents are all valid and infringed by ZTE 3G and 4G cellular devices. The court issued formal judgment to this effect on October 29, 2014.
On November 26, 2014, ZTE filed a motion for judgment as a matter of law that the asserted claims of the ’966, ’847 and ’244 patents are not infringed and, in the alternative, for a new trial. InterDigital filed an opposition on December 15, 2014, and ZTE filed a reply on January 7, 2015.
The ZTE trial addressing infringement of the ’151 patent was held from April 20 to April 22, 2015. On April 22, 2015, the jury returned a verdict in favor of ZTE, finding that the ’151 patent is not infringed by ZTE 3G and 4G cellular devices.
On May 29, 2015, the court entered a new scheduling order for damages and FRAND-related issues, scheduling the ZTE trial related to damages and FRAND-related issues for October 2016.
On September 14, 2015, a panel of Administrative Law Judges of the United States Patent and Trademark Office Patent Trial and Appeal Board (the “PTAB”) issued a final written decision in two Inter Partes Review (“IPR”) cases concerning the ’244 patent. These IPR proceedings were commenced on petitions filed by ZTE Corporation and ZTE (USA) Inc. and by Microsoft Corporation, respectively. Specifically, the panel determined that a number of claims of the ’244 patent are unpatentable as obvious. IPR Licensing, Inc. appealed to the Federal Circuit seeking review of the PTAB’s decision. Oral argument in the appeal was heard on April 7, 2017. On April 20, 2017, the Federal Circuit affirmed the PTAB’s decision that most of the challenged claims of the ’244 patent are unpatentable as obvious. However, the court vacated and remanded the PTAB’s obviousness finding as to claim 8, which returned the matter to the PTAB for further proceedings as to that claim. On July 28, 2017, IPR Licensing, Inc., filed a petition for a writ of certiorari with the U.S. Supreme Court seeking to appeal the Federal Circuit decision, arguing that the petition should be held pending the Supreme Court’s decision in Oil States Energy Services, LLC v. Greene’s Energy Group, LLC , which would later determine whether the IPR process as a whole is unconstitutional.  On October 2, 2017, ZTE filed a response to the petition for a writ of certiorari in which ZTE agreed that the petition should be held pending the Court’s decision in Oil States and then disposed of as appropriate in light of that decision.
On April 24, 2018, the Supreme Court rejected the petitioner’s constitutional challenge to the IPR process in the Oil States case, and on April 30, 2018 denied IPR Licensing, Inc.’s July 28, 2017 petition for a writ of certiorari. On March 6, 2018, in the PTAB remand proceeding, the PTAB again found claim 8 to be invalid. On April 10, 2018, IPR Licensing, Inc. appealed to the Federal Circuit seeking review of the PTAB’s decision. That appeal (the “’244 patent PTAB remand appeal”) remains pending, with oral argument scheduled for August 6, 2019.
On December 21, 2015, the district court entered another scheduling order that vacated the October 2016 date for the ZTE trial related to damages and FRAND-related issues as set forth in the May 2015 scheduling order.
On March 18, 2016, the court denied ZTE’s motion for judgment as a matter of law, or in the alternative for a new trial, with respect to the ’966 and ’847 patents. The court postponed its ruling on ZTE’s motion as to the ’244 patent pending the Federal Circuit’s decision on InterDigital’s appeal of the September 14, 2015 PTAB ruling and administratively closed that portion of the motion.

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On April 18, 2016, ZTE filed a stipulated request for dismissal with prejudice of its counterclaims for breach of contract and patent unenforceability based on FRAND and withdrew its corresponding FRAND-related affirmative defenses. The court granted this request the same day. Also on April 18, 2016, ZTE filed a motion under Federal Rule of Civil Procedure 54(b) seeking certification of partial final judgment on the claims for infringement of the ’966 and ’847 patents to allow ZTE to file an immediate appeal as to those patents. The motion was granted on June 7, 2016, and a partial final judgment was entered on June 20, 2016. On July 18, 2016, ZTE filed its notice of appeal with the Federal Circuit regarding the Delaware District Court’s judgment against ZTE with respect to the ’966 and ’847 patents. Oral argument on ZTE’s appeal was heard on October 4, 2017. On November 3, 2017, the Federal Circuit issued its decision affirming the Delaware District Court judgment finding that the ’966 and ’847 patents are not invalid and are infringed by ZTE 3G and 4G cellular devices. On December 4, 2017, ZTE filed a petition for panel rehearing of the Federal Circuit’s decision. The Federal Circuit denied ZTE’s petition on December 20, 2017, and the court’s mandate issued on December 27, 2017.
On May 15, 2017, InterDigital and Nokia/MMO filed a stipulation of dismissal of the case against MMO, Nokia Corporation and Nokia, Inc. pursuant to a Settlement Agreement and Release of Claims among InterDigital, Microsoft Corporation, Microsoft Mobile, Inc., and MMO, dated May 9, 2017, (the “Microsoft Settlement Agreement”). On May 16, 2017, the Delaware District Court granted the stipulation and dismissed the case against MMO, Nokia Corporation and Nokia, Inc. with prejudice.
The case against ZTE remains pending. On January 23, 2019, InterDigital and ZTE filed a joint status report that informed the court of the Federal Circuit’s decision regarding the ’966 and ’847 patents and that the PTAB proceedings regarding the ’244 patent remained pending. The parties jointly requested that the case remain stayed so that the portion of the case related to damages potentially owed by ZTE as to the three patents-in-suit may be coordinated. The court granted this request on January 25, 2019. The case remains stayed pending the conclusion of the ’244 patent PTAB remand appeal, including any further proceedings.
2011 USITC Proceeding (337-TA-800) and Related ZTE Delaware District Court Proceeding
USITC Proceeding (337-TA-800)
On July 26, 2011, InterDigital’s wholly owned subsidiaries InterDigital Communications, LLC (now InterDigital Communications, Inc.), InterDigital Technology Corporation and IPR Licensing, Inc. filed a complaint with the USITC against Nokia Corporation and Nokia Inc., Huawei Technologies Co., Ltd. and FutureWei Technologies, Inc. d/b/a Huawei Technologies (USA) and ZTE Corporation and ZTE (USA) Inc. (collectively, the “337-TA-800 Respondents”), alleging violations of Section 337 of the Tariff Act of 1930 in that they engaged in unfair trade practices by selling for importation into the United States, importing into the United States and/or selling after importation into the United States certain 3G wireless devices (including WCDMA- and cdma2000-capable mobile phones, USB sticks, mobile hotspots and tablets and components of such devices) that infringe several of InterDigital’s U.S. patents. The action also extended to certain WCDMA and cdma2000 devices incorporating WiFi functionality. InterDigital’s complaint with the USITC sought an exclusion order that would bar from entry into the United States any infringing 3G wireless devices (and components) that are imported by or on behalf of the 337-TA-800 Respondents, and also sought a cease-and-desist order to bar further sales of infringing products that have already been imported into the United States. In May 2012, Huawei Device USA, Inc. was added as a 337-TA-800 Respondent.
The ALJ held an evidentiary hearing from February 12-21, 2013. The patents in issue as of the hearing were U.S. Patent Nos. 8,009,636 (the “’636 patent”), 7,706, 830 (the “’830 patent”), 7,502,406 (the “’406 patent”), 7,616,970 (the “’970 patent”), 7,706,332 (the “’332 patent”), 7,536,013 (the “’013 patent”) and 7,970,127 (the “’127 patent”). The ALJ’s Initial Determination (“ID”) issued on June 28, 2013, finding no violation because the asserted patents were not infringed and/or invalid. Among other determinations, with respect to the 337-TA-800 Respondents’ FRAND and other equitable defenses, the ALJ found that Respondents had failed to prove either that InterDigital violated any FRAND obligations, that InterDigital failed to negotiate in good faith, or that InterDigital’s licensing offers were discriminatory. The ALJ also found that InterDigital is not precluded from seeking injunctive relief based on any alleged FRAND commitments.
Petitions for review of the ID to the Commission were filed by InterDigital and the 337-TA-800 Respondents on July 15, 2013. On September 4, 2013, the Commission determined to review the ID in its entirety.
On December 19, 2013, the Commission issued its final determination. The Commission adopted, with some modification, the ALJ’s finding of no violation of Section 337 as to Nokia, Huawei, and ZTE. The Commission did not rule on any other issue, including FRAND and domestic industry, and stated that all other issues remain under review.
On December 20, 2013, InterDigital filed in the Federal Circuit a petition for review seeking reversal of the Commission’s final determination. On February 18, 2015, the Federal Circuit issued a decision affirming the USITC’s

21


determinations that the claims of the ’830, ’636, ’406 and ’332 patents were not infringed, that the claims of the ’970 patent are invalid, and that the Respondents did not violate Section 337. On April 6, 2015, InterDigital filed a combined petition for panel rehearing and rehearing e n banc as to the ’830 and ’636 patents. The petition was denied on May 12, 2015, and the court’s mandate issued on May 19, 2015.
Related Delaware District Court Proceeding
On July 26, 2011, the same date that InterDigital filed USITC Proceeding (337-TA-800), it filed a parallel action in the United States District Court for the District of Delaware against the 337-TA-800 Respondents alleging infringement of the same asserted patents identified in USITC Proceeding (337-TA-800). The Delaware District Court complaint seeks a permanent injunction and compensatory damages in an amount to be determined, as well as enhanced damages based on willful infringement, and recovery of reasonable attorneys' fees and costs. On September 23, 2011, the defendants in the Delaware District Court complaint filed a motion to stay the Delaware District Court action pending the parallel proceedings in the USITC. Because the USITC has instituted USITC Proceeding (337-TA-800), the defendants have a statutory right to a mandatory stay of the Delaware District Court proceeding pending a final determination in the USITC. On October 3, 2011, InterDigital amended the Delaware District Court complaint, adding LG as a defendant and adding the same additional patent that InterDigital requested be added to USITC Proceeding (337-TA-800). On October 11, 2011, the Delaware District Court granted the defendants' motion to stay. The case is currently stayed through September 9, 2019.
On January 14, 2014, InterDigital and Huawei filed a stipulation of dismissal of their disputes in this action on account of the confidential settlement agreement mentioned above. On the same day, the Delaware District Court granted the stipulation of dismissal.
On May 15, 2017, InterDigital and Nokia filed a stipulation of dismissal of their dispute pursuant to the Microsoft Settlement Agreement discussed above. On May 16, 2017, the Delaware District Court granted the stipulation and dismissed the case with prejudice with respect to Nokia Corporation and Nokia Inc.
In December 2017, InterDigital entered into a patent license agreement with LG, pursuant to which the parties agreed to terms for dismissal by InterDigital of the outstanding litigation among the parties and their affiliates. Accordingly, on December 5, 2017, InterDigital and LG filed a stipulation of dismissal of the case against LG. On the same day, the Delaware District Court granted the stipulation and dismissed the case against LG with prejudice.
The case remains pending with respect to ZTE.
OTHER
We are party to certain other disputes and legal actions in the ordinary course of business, including arbitrations and legal proceedings with licensees regarding the terms of their agreements and the negotiation thereof. We do not currently believe that these matters, even if adversely adjudicated or settled, would have a material adverse effect on our financial condition, results of operations or cash flows. None of the preceding matters have met the requirements for accrual or disclosure of a potential range as of June 30, 2019.
7. BUSINESS COMBINATIONS AND OTHER TRANSACTIONS
Acquisition of Technicolor's Patent Licensing Business
On July 30, 2018, we completed our acquisition of the patent licensing business of Technicolor, a worldwide technology leader in the media and entertainment sector (the "Technicolor Acquisition"). The Technicolor Acquisition included the acquisition by InterDigital of approximately 18,000 patents and applications, across a broad range of technologies, including approximately 3,000 worldwide video coding patents and applications. Refer to our 2018 Form 10-K for further information on the Technicolor Acquisition.
The Technicolor Acquisition met the definition of a business combination, and as such was accounted for using the acquisition method of accounting. We allocated the fair value of consideration transferred to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. We recorded the excess of the fair value of consideration transferred over the net values of these assets and liabilities as goodwill.
The amount of revenue and earnings that would have been included in the Company’s condensed consolidated statement of income for the three and six months ended June 30, 2018 had the acquisition date been January 1, 2017 are reflected in the table below. These amounts have been calculated after applying the Company's accounting policies and adjusting the results to reflect additional interest expense as well as amortization that would have been charged assuming the fair value adjustments to amortizable intangible assets had been recorded as of January 1, 2017. In addition, pro forma

22


adjustments have been made to reflect the impact of the transaction-related costs discussed below. These unaudited pro forma combined results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated, or that may result in the future. The amounts in the table are unaudited (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2018
Actual revenue
$
69,555

 
$
156,999

Supplemental pro forma revenue
72,419

 
162,727

Actual earnings
10,966

 
41,196

Supplemental pro forma earnings (loss)
(426
)
 
17,662

Actual diluted earnings per share
0.31

 
1.16

Supplemental pro forma diluted earnings (loss) per share
(0.01
)
 
0.50


Acquisition of Technicolor's Research & Innovation Unit
On May 31, 2019, we completed the acquisition of the Research & Innovation, or R&I, unit of Technicolor SA. The acquisition brings the Company’s research team to approximately 340 engineers in eight R&D offices worldwide, and expands the Company’s research capabilities in video coding, Internet of Things ("IoT") and smart home, imaging sciences, augmented reality and virtual reality, and artificial intelligence and machine learning technologies. The R&I unit was the driving creative force behind the patent portfolio that was acquired in the Technicolor Acquisition discussed above.
The acquisition of the R&I unit met the definition of an asset acquisition and was accounted for using the cost accumulation and allocation model. There was no cash consideration for the acquisition. As consideration for the acquisition, the jointly funded R&D collaboration that was entered into as part of the Technicolor Acquisition was terminated. Technicolor will continue to fund research to be performed by the R&I unit for certain limited projects for a specified time period, subject to renewal. The Company also assumed certain employee-related liabilities, including obligations for certain defined benefit post-retirement plans for the acquired R&I unit employees, which are further discussed below. Additionally, Technicolor agreed to reduce its rights under the revenue-sharing arrangement entered into as part of the Technicolor Acquisition, as further discussed below.
The acquisition of the R&I unit resulted in a net gain of approximately $14.2 million in second quarter 2019, inclusive of the $20.5 million gain from the derecognition of the contingent consideration liability described below, all of which is included within “ Other Income (Net) ” in the condensed consolidated statement of income.
Contingent Consideration
The original revenue-sharing arrangement between the Company and Technicolor created a contingent consideration liability upon closing of the Technicolor Acquisition in third quarter 2018. Refer to our 2018 Form 10-K for further information on the initial contingent consideration liability which was accounted for at fair value each reporting period.
Under the amended revenue-sharing arrangement described above, Technicolor will now receive 42.5% of future cash receipts from new licensing efforts from the Madison Arrangement (as defined below) only, subject to certain conditions and hurdles, but will no longer receive revenue-sharing from other licensing efforts in the consumer electronics field outside of the Madison Arrangement. We determined that the initial contingent consideration liability from the Technicolor Acquisition was significantly modified in conjunction with the acquisition of the R&I unit, and, as such, the contingent consideration liability will now be accounted for under ASC 450 - Contingencies under the asset acquisition framework when the liability is deemed probable and estimable. Since the contingent consideration liability arising from the amended revenue-sharing arrangement was not probable and estimable as of the acquisition date, the carrying value of the previous contingent consideration liability was derecognized, which resulted in a $20.5 million gain and is included within " Other Income (Net) ” in the condensed consolidated statement of income.
Defined Benefit Plans
In connection with the Technicolor Acquisition and the acquisition of the R&I unit, we assumed certain defined benefit plans which are accounted for in accordance with ASC 715 - Compensation - Retirement Benefits . These plans include a retirement lump sum indemnity plan and jubilee plan, both of which provide benefit payments to employees based upon years of service and compensation levels. As of June 30, 2019, the combined accumulated projected benefit obligation related to

23


these plans totaled $6.7 million. Service cost and interest cost for the combined plans totaled $0.1 million for the six months ended June 30, 2019. These plans are not required to be funded and were not funded as of June 30, 2019.
Madison Arrangement
In conjunction with the Technicolor Acquisition, effective July 30, 2018, we assumed Technicolor’s rights and obligations under a joint licensing program with Sony Corporation (“Sony”) relating to digital televisions and standalone computer display monitors, which commenced in 2015 and is referred to as the "Madison Arrangement." We also assumed Technicolor's role as sole licensing agent for the Madison Arrangement. As licensing agent, we are responsible for making decisions regarding the prosecution and maintenance of the combined patent portfolio and the licensing and enforcement of the combined patent portfolio in the field of use of digital TVs and computer display monitors on an exclusive basis during the specified term in exchange for an agent fee. The Madison Arrangement falls under the scope of ASC 808, Collaborative Arrangements (“ASC 808”). Refer to our 2018 Form 10-K for further information on the Madison Arrangement.
Long-term debt
An affiliate of CPPIB Credit Investments Inc. ("CPPIB Credit"), a wholly owned subsidiary of Canada Pension Plan Investment Board, is a third-party investor in the Madison Arrangement. CPPIB Credit has made certain payments to Technicolor and Sony and has agreed to contribute cash to fund certain capital reserve obligations under the arrangement in exchange for a percentage of future revenues, specifically through September 11, 2030 in regard to the Technicolor patents.
Upon our assumption of Technicolor’s rights and obligations under the Madison Arrangement, our relationship with CPPIB Credit meets the criteria in ASC 470-10-25 - Sales of Future Revenues or Various Other Measures of Income (“ASC 470”), which relates to cash received from an investor in exchange for a specified percentage or amount of revenue or other measure of income of a particular product line, business segment, trademark, patent, or contractual right for a defined period. Under this guidance, we recognized the fair value of our contingent obligation to CPPIB Credit, as of the acquisition date, as long-term debt in our condensed consolidated balance sheet. This initial fair value measurement was based on the perspective of a market participant and included significant unobservable inputs which are classified as Level 3 inputs within the fair value hierarchy. The fair value of the long-term debt as of June 30, 2019 and December 31, 2018 is disclosed within Note 8. Our repayment obligations are contingent upon future royalty revenues generated from the Madison Arrangement and there are no minimum or maximum payments under the arrangement.
Under ASC 470, amounts recorded as debt are amortized under the interest method. At each reporting period, we will review the discounted expected future cash flows over the life of the obligation. The Company made an accounting policy election to utilize the catch-up method when there is a change in the estimated future cash flows, whereby we will adjust the carrying amount of the debt to the present value of the revised estimated future cash flows, discounted at the original effective interest rate, with a corresponding adjustment recognized as interest expense within “ Interest Expense ” in the condensed consolidated statements of income. The effective interest rate as of the acquisition date was approximately 14.5%. This rate represents the discount rate that equates the estimated future cash flows with the fair value of the debt as of the acquisition date, and is used to compute the amount of interest to be recognized each period based on the estimated life of the future revenue streams. During the three and six months ended June 30, 2019 , we recognized $0.6 million and $1.3 million, respectively, of interest expense related to this debt which was included within “ Interest Expense ” in the condensed consolidated statements of income. Any future payments made to CPPIB Credit, or additional proceeds received from CPPIB Credit, will decrease or increase the long-term debt balance accordingly.
Restricted cash
Under the Madison Arrangement, the parties reserve cash in bank accounts to fund our activities to manage the portfolios. These accounts are custodial accounts for which the funds are restricted for this purpose. Refer to Note 8 for a reconciliation of total cash, cash equivalents and restricted cash as of June 30, 2019 and December 31, 2018 to the captions within the condensed consolidated balance sheets.
Commitments    
To receive consent from both Sony and CPPIB Credit to assume the rights and responsibilities of Technicolor under the Madison Arrangement, we committed to contributing cash to fund shortfalls in the Madison Arrangement, up to a maximum of $25.0 million, through 2020. A shortfall funding is only required in the scenario where the restricted cash is not sufficient to fund current obligations. In the event that we fund a shortfall, any surplus cash resulting from subsequent royalty receipts would be used to repay our shortfall funding plus 25% interest in advance of distributions of royalties to either Sony or CPPIB Credit, assuming they have not participated in the funding of the shortfall. As of June 30, 2019 , we have not contributed any shortfall funding.
Transaction costs

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Transaction and integration related costs related to the above transactions for the three months ended June 30, 2019 and 2018 were $1.7 million and $2.3 million , respectively. Transaction and integration related costs related to the above transactions for the six months ended June 30, 2019 and 2018 were $4.8 million and $3.8 million , respectively. The majority of these costs were recorded within “Patent administration and licensing” and “Selling, general and administrative” expenses in the condensed consolidated statements of income.
8. CASH, CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash as of  June 30, 2019 and December 31, 2018 consisted of money market and demand accounts. The following table provides a reconciliation of total cash, cash equivalents and restricted cash as of June 30, 2019 and December 31, 2018 to the captions within the condensed consolidated balance sheets (in thousands). The Company had no restricted cash balance prior to third quarter 2018.
 
June 30,
 
December 31,
 
2019
 
2018
Cash and cash equivalents
$
531,698

 
$
475,056

Restricted cash included within prepaid and other current assets
11,465

 
13,677

Total cash, cash equivalents and restricted cash
$
543,163

 
$
488,733

Concentration of Credit Risk and Fair Value of Financial Instruments
Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash equivalents, short-term investments, and accounts receivable. We place our cash equivalents and short-term investments only in highly rated financial instruments and in United States government instruments.
Our accounts receivable and contract assets are derived principally from patent license and technology solutions agreements. As of June 30, 2019 and December 31, 2018 , five licensees comprised 72% and 76% of our net accounts receivable balance, respectively. We perform ongoing credit evaluations of our licensees, who generally include large, multinational, wireless telecommunications equipment manufacturers. We believe that the book values of our financial instruments approximate their fair values.
Fair Value Measurements
We use various valuation techniques and assumptions when measuring the fair value of our assets and liabilities. We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. This guidance established a hierarchy that prioritizes fair value measurements based on the types of input used for the various valuation techniques (market approach, income approach and cost approach). The levels of the hierarchy are described below:
Level 1 Inputs — Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets.
Level 2 Inputs — Level 2 includes financial instruments for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets with insufficient volume or infrequent transactions (less active markets) or model-driven valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data, including market interest rate curves, referenced credit spreads and pre-payment rates.
Level 3 Inputs — Level 3 includes financial instruments for which fair value is derived from valuation techniques including pricing models and discounted cash flow models in which one or more significant inputs are unobservable, including the Company’s own assumptions. The pricing models incorporate transaction details such as contractual terms, maturity and, in certain instances, timing and amount of future cash flows, as well as assumptions related to liquidity and credit valuation adjustments of marketplace participants.
Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy. We use quoted market prices for similar assets to estimate the fair value of our Level 2 investments.
Recurring Fair Value Measurements

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Our financial assets are generally included within short-term investments on our condensed consolidated balance sheets, unless otherwise indicated. Our financial assets and liabilities that are accounted for at fair value on a recurring basis are presented in the tables below as of June 30, 2019 and December 31, 2018 (in thousands):
 
Fair Value as of June 30, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market and demand accounts (a)
$
543,163

 
$

 
$

 
$
543,163

Commercial paper (b)

 

 

 

U.S. government securities

 
167,236

 

 
167,236

Corporate bonds, asset backed and other securities

 
132,225

 

 
132,225

  Total
$
543,163

 
$
299,461

 
$

 
$
842,624



 
Fair Value as of December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market and demand accounts (a)
$
488,733

 
$

 
$

 
$
488,733

Commercial paper (b)

 
14,548

 

 
14,548

U.S. government securities

 
289,576

 

 
289,576

Corporate bonds, asset backed and other securities

 
166,600

 

 
166,600

  Total
$
488,733

 
$
470,724

 
$

 
$
959,457